Foreign aid, workers’ remittances and economic growth in Jordan

Purpose - The purpose of this paper is to investigate the long-run impact of foreign aid and workers’ remittances on Jordanian economic growth using time series data for the period 1970–2014. Following the most recent literature, the author also assess whether economic policy enhances economic growth and whether aid effectiveness is conditional on levels of economic policy. Design/methodology/approach - The author employs unit root tests that allow for endogenously determined structural breaks (Perron, 1997) and properly utilize the autoregressive distributed lag (ARDL) or bounds testing approach to cointegration by applying both theF- and thet-test statistics (Pesaranet al., 2001). The analysis is applied to 12 different models that incorporates the various types and sources of foreign aid. Findings - Empirical results suggest that aid and its various components, and workers’ remittances have had a positive and significant long-run impact on economic growth. Empirical results also show: no evidence supporting the hypothesis that aid is only or more effective in spurring economic growth during periods of “good” macroeconomic policy, i.e., when Jordan has undertaken World Bank Structural Adjustment Programs (SAPs); no robust evidence supporting the World Bank’s claim thatSAPs are growth enhancing. Moreover, the author found strong empirical evidence suggesting that exports and human capital are also major determinants of long-run growth in Jordan. Research limitations/implications - Although Jordan and the region at large have experienced periods of major political instability that may have had a varying impact on the economy, lack of a reliable and lengthy time series measure that accounts for political instability is not available to include in the study. Practical implications - Using cointegration analysis, our empirical evidence reveals that foreign aid, labor remittances, exports and human capital have had a robust positive long-run impact on economic growth. Hence, the Jordanian government should promote policies that encourage donor countries and agencies to further extend aid to Jordan. Moreover, policies that promote exports and facilitate labor mobility to neighboring countries should also be encouraged and promoted. Originality/value - Despite receiving a significant amount of foreign aid and labor remittances in the last 50 years, the author found no time series study that tested the long-run impact of these external financing sources on growth in Jordan. This study fills that gap and extends the analysis to test whether macroeconomic policy is growth enhancing and whether aid (and several of its components) are only effective or more effective in promoting growth during periods of “good” macroeconomic policy, i.e., when Jordan has undertaken a World BankSAP.